Tuesday, January 13, 2009

Calpers Losses in Real Estate

I overlooked this article over the holidays. From the Wall St. Journal via St. Louis Today.


"At the height of the property bubble, California's giant pension fund,
known as Calpers, made a fateful decision: It aggressively poured money into
real estate. As a result, today it's one of the biggest owners of undeveloped
residential land in America.Partly because of these investments, California
Public Employees' Retirement System is struggling to avoid one of its worst
annual declines since its 1932 inception. Cal­pers has lost almost a quarter
of its assets since July 1."Robert Carlson, a former Calpers board member who left the board earlier thisyear, said publicly at that time, "We believe taking no risk is the biggest riskyou can take."

My comment: 'No risk' is looking like a pretty good investigating strategy from this vantage point - but of course 'nobody saw this coming'.

Back to the article:
Land purchases are among the riskiest real estate investments. Not only can
property values swing wildly, but unlike, say, a stock, land can take months or
years to sell. Amplifying risk, many of Calpers' land investments used borrowed
money.Investing borrowed money acts as a lever: In a rising market, it lifts
overall returns because you're profiting not only on your own capital, but the
borrowed money, too. But in a falling market, that leverage amplifies losses.


My comment: Why Calpers was investing like an amateur condo flipper and leveraging up like a hedge fund is curious. One would think their fiduciary duty towards California's Public Employees would be questioned at some point...

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